Italian government announces 'brave and responsible' budget plan

Simona Granati | Corbis | Corbis News | Getty Images ROME, ITALY - OCTOBER 02: Minister Luigi Di Maio during the Press conference of Movimento 5 Stelle and Lega for the presentation of proposals for constitutional reform and decrease in the number of parliamentarians on October 2, 2018 in Rome, Italy.

Italy's anti-establishment government has announced its new strategy to financial policy: a "brave and res ponsible" initiative, but the European Union and the markets are yet to accept it.

Italy has put forward its final budget targets for the coming years on Thursday evening, ending weeks of speculation about its spending plans. The government cut growth forecasts and went ahead with higher spending, despite some backlash from European officials. The populist cabinet made it clear however that the expenses would not only involve social measures but also with investments.

"As stated on several occasions, the budget manoeuvre that this Government is preparing to launch is brave and responsible, focusing on the growth and well-being of citizens," the Italian finance minister Giovanni Tria said Thursday in a letter to the European Commission.

On Thursday, Rome cut th is year's growth forecast to 1.2 percent from a previous estimate of 1.5 percent. Due to planned "public and private investments, lower tax burden on small and medium-sized enterprises and self-employed workers", the growth rate is expected to be 1.5 percent in 2019, followed by 1.6 percent in 2020 and 1.4 percent in 2021.

The lower growth forecasts sent Italy's main stock index lower on Friday morning and pushed Italy's borrowing costs slightly higher too. Investors are concerned that a growth rate around 1 percent and higher spending will put Italy at risk. Italy has the second largest debt pile in Europe and in such conditions, it could find itself in a crisis mode out of the sudden.

Italy also confirmed a deficit target of 2.4 percent of the gross domestic product (GDP) in 2019 and cut its target to 2.1 percent in 2020 and 1.8 percent in 2021.

The populist government also set a debt-to-GDP target of 130 percent for 2018, 130 percent in 2019, 128.1 percent in 2020 and 126/7 percent in 2021.

Time for 'confrontation'

With the budget ready, it is time for Brussels to analyse and give its opinion before the end of November.

George Saravelos, global co-head of FX research at Deutsche Bank, told CNBC's "Street Signs" that what matters for markets is the relationship between Rome and Brussels.

"There's been a lot of noise around Italy, but I think the key question to focus on is not the rounding around the budget numbers that they are predicting or forecasting, but more this perception of whether the relationship with Europe is cooperative or whether it is disruptive," he said.

A spokesperson for the European Commission told CNBC on Friday morning that it received the letter from Italy's Finance Minister Tria and that it will reply in "the coming days, taking note of the government's intention and recalling the requirements set out in the council recommendation to Italy of July 13, 2018." The latter point refers to a meeting between the European finance ministers, when Italy was told it should adjust its revenues and expenses by 0.6 percent.

Some European officials have outlined their reservations regarding Italy's spending plans , which for 2019 are three times higher than those that the previous government had planned. European Commissioner Pierre Moscovici said that the budget seems to be "beyond the limits" of European fiscal rules.

Meanwhile, according to a Reuters report, citing a source, the European Central Bank President Mario Draghi warned the Italian President Sergio Mattarella on Wednesday about the impact of a negative market reaction on the back of Italy's 2019 budget. The European Central Bank could not provide any comment when contacted by CNBC.

Luigi di Maio, Italy's deputy prime minister and leader of the leftist Five Star Movement, said Friday that he would rather protect the Italian people than to bow to financial markets. Matteo Salvini, Italy's other deputy prime minister and leader of the right-wing Lega party, said Friday that p eople like the European Commission President and Commissioner Moscovici "have ruined" Europe and Italy.

"Now the confrontation phase opens with the European Commission, which will be able to assess the well-founded reasons for the Government's growth strategy outlined by the maneuver," Tria said Thursday, hoping for an "open and constructive" discussion.